Op-Eds
Before Wednesday's Bank of Canada interest-rate hike, financial markets had priced in only a 50-50 chance of such a move. This means that half the market believed the bank would hold rates steady, creating significant market uncertainty.
Uncertainty has big economic costs for consumers and businesses alike. Does the bank need to continue to improve its communication to alleviate these costs? The short answer is yes – but the question is how.
The thinking on options tends to fall into two camps. In the first camp are those arguing for publishing a conditional interest-rate forecast. One of the primary benefits of such a conditional forecast is to provide realistic expectations to financial markets. Businesses and…Canadian monetary policy has just seen one of its most significant U-turns in recent years. On May 24, the Bank of Canada announced that it was holding its overnight rate steady. The tone of the announcement was less dovish than the previous one, but contained nothing to indicate impending rate increases. Shortly after the May announcement, markets were predicting a 5-per-cent chance of a rate increase in July. However, in the days preceding Wednesday’s announcement, that probability surpassed 90 per cent. With the bank increasing rates on Wednesday, how did we get so quickly from there to here?
Let’s start with the case for the rate hike. Unemployment has fallen to 6.5 per cent, GDP growth in the first quarter of 2017 was robust…
We have been stuck in a low-interest period for almost a decade now, and with that apparent inertia comes the challenge of knowing when to start reversing course. Last Wednesday’s interest rate announcement and press release by the Bank of Canada were slightly more hawkish (or slightly less dovish) in tone than its previous announcement, but it gave no explicit hints that rate increases are on the immediate horizon. However, stronger economic data that support the bank’s own internal forecasts suggest they should be. At a minimum, communication with the public should start to prepare the market for such increases.
To understand why, let’s review the concept of the neutral rate of interest. In the world of central banking, the…
The Bank of Canada announced on Wednesday, in a familiar refrain, that it is maintaining its target for the overnight rate. However, the announcement and accompanying news conference signalled a definite change of tone. Barring major negative surprises, it took the possibility of a rate cut off the table. With inflation at target, should the positive economic news continue, a rate hike before 2018 is a real possibility. Two questions arise: first, what might cause this earlier rate hike, and second, is it necessarily a good thing?
Positive economic news that leads to an improvement in the real economy, and thereby an increase in inflation would be a good problem for the Bank of Canada. However, there are at least two…
After a prolonged wait, the U.S. Federal Reserve raised its target for the Fed funds rate by 25 basis points last week. Its statement also hinted at three possible increases in 2017. Many Canadians are now asking if the Bank of Canada should raise its overnight rate in response. The short answer is “No.” Following the Fed’s rate hike, the Bank of Canada should do exactly what it was doing before the Fed’s hike: setting its overnight rate at the level required to hit its 2-per-cent inflation target.
That might seem like a simplistic answer. The Fed’s move, and the hawkish commentary that accompanied it, did send long-term interest rates and the U.S. dollar higher. Lots of people reacted. Shouldn’t we react, too?
Starting…
